MUMBAI: Traders are taking fancy to shares of tyre manufacturers in a weak market on expectations that low rubber prices and pick-up in auto sales will boost profits and margins.
The rubber prices have been on a steady decline in line with other soft commodities. The prices are at four-year low and quoting at Rs 126 per kg.
According to analysts, the reason for sharp decline in prices has been due to cheaper imports. According to data from the Rubber Board, between April and July, 133,789 tonnes were brought into the country. This is for the first time that the import has crossed 100,000 tonnes in four months.
The global market is likely to see a surplus for another three years, causing gluts of 652,000, 483,000 and 316,000 tonnes in 2014, 2015 and 2016, respectively.
The pick-up in auto sales figures has also boosted sentiment in tyre companies. They also benefit from replacement market.
“Volumes across most auto segments and players were strong led by improving sentiment, low base and festive season led build up. While 2-wheelers and cars saw robust growth, MHCVs also saw growth this month, mainly on low base,” said IDBI Capital report.
Analysts are of the view that one of the direct beneficiaries of domestic OEM recovery will be the tyre space.
“Tyre stocks are gradually making new highs, especially on the back of rubber prices being at new lows.The domestic price of rubber is below Rs 130 per kg. That gives you the confidence of improving gross margins in the forthcoming few quarters,” said Basudeb Banerjee, Research Analsyt, Antique to ET Now.
“Definitely, with volume recovery aided by favourable raw material prices, all tyre stocks should continue to do well, which they have been for the past almost 12 months. Ceat gave us a splendid return in the past 12 months. We expect the other players like Balkrishna and JK Tyres to continue the same,” he added.
Centrum Broking has retained Buy on MRF with a revised target price of Rs 31,700.
“Our confidence is driven by its ability to maintain better than industry growth and sustain strong margin profile as seen in the past few quarters. Our recent interaction with dealers pointed to QoQ uptick in replacement demand in a few pockets,” the report said.
“The recent correction in rubber prices and stable pricing scenario in the replacement market bode well for margins across players,” the report added.
Quantum Securities is of the view that decline in rubber prices have led to improvement in J K Tyres’s profitability of the Indian operations both sequentially as well as on a Y-o-Y basis.
“JK Tyre reported significant improvement in replacement demand over the past two months and expects H2FY15 to be significantly better. Mexican operations are also expected to improve its performance going forward,” the report said.
The brokerage has ‘Accumulate’ rating on the stock with price target of Rs 313.
According to Microsec report, Apollo Tyres, Ceat Tyres, MRF and J K Tyres are likely to benefit from decline in prices.
– India Times
